Interest rate cut expectations resurface! The market is betting real money that the "anchor of global asset pricing" will fall to 4%

According to the Zhitong Finance APP, traders in the U.S. Treasury market are heavily betting on a decline in the 10-year Treasury yield through options, believing that Federal Reserve Chairman Jerome Powell's significant dovish signal of "not ruling out a rate cut in July" released in the U.S. Congress has significantly boosted rate cut expectations. Coupled with the generally dovish statements from Federal Reserve officials recently and the ongoing tense macroeconomic backdrop in the Middle East, the 10-year U.S. Treasury yield, known as the "anchor of global asset pricing," is expected to embark on a significant downward trajectory, falling below 4%—that is, betting that the yield curve will drop to its lowest level since April.

Statistics show that such bets have paid at least $38 million in option premiums since last Friday and during this week's trading days, primarily concentrated on call options for the 10-year Treasury maturing in August, aimed at hedging the risk of the 10-year Treasury yield dropping sharply from the current approximately 4.3% to 4% or below (the yield and price of U.S. Treasuries move inversely), reflecting a comprehensive upgrade in rate cut expectations for the first time this year, sweeping through the global financial market again after six months. In particular, traders are currently incorporating further rate cut expectations into the front end of the curve, with swap pricing showing a significant increase in the probability of a rate cut in July recently.

If the 10-year Treasury yield falls directly below 4% as the market expects, it will reach its lowest level since the so-called "Liberation Day"—the day when U.S. President Trump unexpectedly announced significant tariffs on April 2, leading to market turmoil—and will also mean a significant retreat compared to the peak of the Treasury yield in May (over 4.6%). At that time, the financial market experienced a surge in long-term Treasury yields of 10 years or more due to concerns over the imbalance in supply and demand for Japanese government bonds and escalating worries about government spending in the U.S. and other major developed economies.

In just about a week, a series of core hedging factors for going long on U.S. Treasuries have emerged, particularly from Federal Reserve Chairman Jerome Powell, as well as Federal Reserve Governor Christopher Waller and Vice Chair (in charge of supervision) Michelle Bowman, who have hinted that a rate cut could come as early as July. Some analysts have suggested that Trump's recent pressure on the Federal Reserve for aggressive rate cuts may be pushing some officials toward a rate cut stance. On the eve of Powell's remarks in Congress, Trump again pressured Powell, calling for the Federal Reserve to cut rates significantly: the Federal Reserve should cut by at least two to three percentage points!

Previously, Federal Reserve Chairman Powell stated last week that he remains patient regarding further easing paths while observing the specific impact of Trump's tariff policies on the U.S. economy; on Tuesday, his testimony in Congress reflected a dovish policy stance, indicating in the House of Representatives that if inflation is controlled, he would cut rates as soon as possible, rather than later, and does not rule out that the impact of tariffs on inflation may not be as significant as expected, thus not ruling out the possibility of a rate cut in July, but suggesting it is more likely to wait until at least September The market begins to price in the possibility of a rate cut in July, fully pricing in a 50 basis point cut this year

Traders in the global financial markets have increased the pricing of rate cuts at the short end of the U.S. Treasury yield curve. The swap contract market is currently beginning to price in the possibility of a rate cut in July, a sentiment that has remained unchanged this year, finally pricing in a rate cut of about 4 basis points for the July Federal Open Market Committee (FOMC) meeting this week, which was nearly zero before the speeches by Bowman and Powell; the remaining four meetings this year are collectively pricing in a 60 basis point rate cut expectation (higher than the 50 basis points indicated by the FOMC dot plot), significantly up from 45 basis points a week ago, indicating that the swap contracts are fully pricing in the possibility of two rate cuts this year (expected in September and December), totaling a 50 basis point cut.

The unexpectedly weak U.S. consumer confidence data released on Tuesday also supported these dovish option positions to some extent and pushed U.S. Treasury pricing higher, leading to a drop in the 10-year Treasury yield, which briefly fell below 4.3%, marking the lowest level since early May. The Conference Board reported on Tuesday that its consumer confidence index fell by 5.4 points to 93 in June, below the expected range of all economists surveyed by foreign media. The decline in this index nearly erased the rebound seen in May due to the temporary tariff relief agreement reached between China and the U.S. The index reflecting consumer expectations for the next six months dropped by 4.6 points, with the proportion of respondents expecting improved business conditions experiencing the largest decline in over two years. The current economic conditions index also fell by 6.4 points.

Open interest in 10-year options - Significant increase in August call options, targeting a 4% yield

Most of the option trading activity occurred on Friday and Monday, just before Trump announced a ceasefire between Iran and Israel, leading to a significant drop in yields.

U.S. Treasury option traders are betting on continued declines in the 10-year yield through August call options, indicating that the open interest in 10-year options anchored in August has surged since Friday. On Monday, a trade was executed buying contracts with a strike price of 113.00 for a premium of about $10 million, equivalent to a 10-year Treasury yield of around 4%. The latest open interest data shows that the long positions bought since Friday represent new risk rather than closing out old positions.

The following is an overview of the latest position indicators in the U.S. Treasury trading market and interest rate market:

JP Morgan Treasury Client Survey Report

In the cash market for U.S. Treasuries, JP Morgan's client survey data as of the week ending June 23 shows that absolute net long positions have decreased by 4 percentage points, shifting to a neutral position. Currently, the net long positions of all Treasury trading clients covered by JP Morgan's survey remain at the lowest level in three weeks.

JP Morgan National Bond Client Position Survey - Client Net Long Position at Lowest Since June 2

Most Active SOFR Options

Among the SOFR options expiring in September 2025, December 2025, and March 2026, the contract with a strike price of 95.6875 is the most favored, especially for put options. Large trades that occurred in the past week include: SFRU5 95.6875/95.625 1x2 put spread; SFRU5 95.75/95.625 put spread; SFRZ5 95.375/95.625 put spread.

The latest SOFR options trading structure does not contradict the bullish bets on the 10-year U.S. Treasury yield dropping to 4%—the long end bets on "rate cut expectations driving a significant decline in the 10-year U.S. Treasury yield," while the front end of SOFR options locks in the excessively high rate cut pricing in the market; together, they form a hedging network based on a significantly warming expectation of rate cuts leading to a "comprehensive steepening + wide fluctuations" of the yield curve.

Most Active SOFR Option Strike Prices - Top 5 and Bottom 5 Weekly Net Changes in SOFR Option Strike Prices

SOFR Options Heatmap

The 95.625 strike price is the most concentrated in the September 2025, December 2025, and March 2026 options trading, with significant put positions in Sep25 and Dec25. On Monday, due to unexpectedly dovish remarks from Fed officials like Bowman, a large number of Sep25 and Dec25 one-year SOFR curve structure positions were closed out, indicating that some investors are locking in profits and reassessing a more dovish rate cut path—the curve is reflecting a larger scale of rate cut expectations.

SOFR Options Open Interest - Anchored to the 20 Most Popular Option Strike Prices for September 25, December 25, and March 26

U.S. Treasury Options Skew

Currently, the skew of U.S. Treasury options overall leans towards a bullish stance, indicating that due to the recent significant warming of rate cut expectations, traders are forced to pay high premiums to hedge against a substantial rise in bond prices (declining yields). The long end of U.S. Treasury skew has turned bullish for the first time since April. In recent trading days, the market has continued to price in the possibility of Fed rate cuts exceeding the dovish expectation of 50 basis points shown in the FOMC dot plot, with significant demand for 10-year Treasury options concentrated on bullish structures targeting a yield of about 4% expiring in August

CFTC Futures Positions

As of the week ending June 17, CFTC statistics show that traditional asset management institutions continued to increase their net long positions in Treasury futures: a total increase of approximately $145,000/DV01 in 2-year, 10-year, and over 10-year maturities. Hedge funds, on the other hand, increased their short positions in 10-year U.S. Treasury bonds by about $49,000/DV01, but covered a total of $46,000/DV01 in short positions in long and ultra-long U.S. Treasury futures.

"Anchor of Global Asset Pricing" Cools Down, Favoring Valuation Expansion of Risk Assets like Stocks

Since the beginning of this year, U.S. Treasury investors have generally felt pressure due to inflation concerns triggered by the global trade war initiated by the Trump administration and the increasingly expanding debt burden in the U.S.

In particular, with the persistent expectations of a significant expansion of the U.S. government's budget deficit and the increasingly pessimistic outlook on U.S. Treasury yields, bond traders have begun to demand higher "term premiums." As a result, the yield on 10-year U.S. Treasuries has remained above 4.5% this year, exerting significant pressure on the valuations of risk assets like stocks. If the yield on 10-year U.S. Treasuries heads toward 4%, it would undoubtedly help the stock market move onto an upward trajectory, especially with technology stocks closely related to artificial intelligence likely to see positive catalysts.

From a theoretical perspective, the yield on 10-year U.S. Treasuries corresponds to the risk-free rate indicator r in the important valuation model of the stock market—DCF valuation model. When other indicators (especially the cash flow expectations on the numerator side) have not changed significantly—such as during earnings season, where the numerator is in a vacuum due to a lack of positive catalysts—if the denominator level is higher or continues to operate at historical highs, the valuations of technology stocks, high-yield corporate bonds, and risk assets like cryptocurrencies, which are at historical high valuations, face the risk of collapse